Hedging - Summary And Review

SummaryAn anticipatory hedge is a contract purchased in expectation of needing a commodity at a later date.

The basis is the difference between the cash and futures prices for a commodity. A trader is long the basis if he bought the commodity and hedged with a sale of futures contracts, or short the basis if he bought the futures as a hedge against a commitment to sell in the cash market. The basis has implications for the markets, its participants and the commodities traded.

A trader needs to be able to calculate the net results of long and short hedges in both rising and falling markets. She must also be able to determine net prices factoring in both hedged and unhedged positions.

Review

A trader is long 100 wheat contracts and is concerned about rumors of rising prices so he shorts 50 contracts. This is an anticipatory hedge.

True

False

In August, the November futures price for a commodity is $2 and the cash price is $1. For the last three years, the cash price in August was $1, but the November futures price was closer to $3. The December futures price is $1.80. Which statement is false?